Fletcher Challenge Canada Ltd. v. R., [1998] 1 CTC 2279, 98 DTC 1048

Sobier T.C.J. :

The Appellant appeals from the assessments by the Minister of National Revenue (the “Minister”) for its taxation year ended September 30, 1988, in the manner set forth in paragraphs 32 and 33 of the Statement of Agreed Facts set forth below.

It was agreed that the Minister did not have the right to assess recapture of capital cost allowance in the amount of $60,094 in 1988. Therefore, the appeal with respect to this issue is allowed.

The parties filed a Statement of Agreed Facts, which states as follows: 1. The Appellant is a British Columbia public company formed as a result of an amalgamation of twenty-four companies under the Company Act of British Columbia on December 30, 1971. At the date of the amalgamation the Appellant was named British Columbia Forest Products Limited and subsequently changed its name to Fletcher Challenge Canada Limited. References to the Appellant in this document are agreed to also be references to British Columbia Forest Products Limited before it changed its name.

2. The appeal under action 95-772(IT)G is an appeal under the Income Tax Act (the “Act”). It has been properly taken by the Appellant in response to a notice of reassessment dated February 8, 1994 which was issued by the Minister of National Revenue (the “Minister”) for the Appellant’s September 30, 1988 taxation year. A copy of the notice of reassessment and supporting documents is Schedule “A” to this Statement of Facts J [1]

3. Prior to 1969 the Appellant was the holder of Special Timber Licences 8044p and 8045p which are referred to herein as the “Pacific Rim Licences”.

4. The Appellant was the last assignee of the Pacific Rim Licences which it acquired at a cost of $259,178 from Moore-Whittington Lumber Co. Limited (“Moore-Whittington”) in 1963.

5. The Pacific Rim Licences were one of a number of types of timber tenure originally granted by the Crown in the early 1900’s, referred to in provincial legislation as Old Temporary Tenures (rights to harvest timber).

6. At the time the Pacific Rim Licences were acquired they were subject to the terms and conditions of Tree Farm Licence 27 (“TFL27”). A copy of TFL27 is attached as Schedule “B”.

7. TFL27 was a contractual agreement originally entered into by the Province and Moore-Whittington in 1958 and the rights and obligations thereunder were assigned to and assumed by the Appellant in 1963.

8. In 1969, the Province enacted the West Coast National Park Act (the “Park Act”) which received royal assent on April 2, 1969. The Park Act allowed the Province to enter into agreements with the Government of Canada which dealt, inter alia, with the establishment and maintenance of a new national park on provincial lands (the “Pacific Rim National Park’’), contributions by the Province towards the costs of establishing and maintaining the park and the acquisition of privately held lands within the proposed park boundaries. A copy of the Park Act is attached as Schedule “C”.

9. In 1969, the Appellant, at the request of the Minister of Forests, agreed to suspend its plans to carry out logging operations on the lands covered by the Pacific Rim Licences. These lands were located in Compartment 3 of TFL27.

10. The Province and Canada entered into an agreement dated April 21, 1970 (the “Park Agreement”) which, inter alia, set out three separate areas that were to make up the Park and described these areas as the Part I, Part IT and Part III Lands. From time to time, the parties amended the Park Agreement to alter or increase the amount of land contained in the Part I, II, III, and ultimately added Part IV Lands.

11. The Lieutenant-Governor in Council designated the Part I and Part II lands on April 28, 1970, pursuant to Section 7 of the Park Act.

12. The Lieutenant-Governor in Council never designated the Part III lands pursuant to Section 7 of the Park Act.

13. As of April 28, 1970, the Pacific Rim Licences were not situate in Part I, II, III or IV Lands.

14. The Appellant had an allowable annual cut (“AAC”) in TFL27 allocated to it by the Forest Service prior to the enactment of the Park Act. The AAC dictated the amount of timber that the Appellant was entitled to cut in TFL27, and was based on the total volume of timber within the Tree Farm Licence, including the area covered by the Pacific Rim Licences.

15. Following the Appellant’s agreement not to cut timber in Compartment 3, the Forest Service did not reduce the Appellant’s AAC within TFL27. The Appellant increased its cut in Compartments 1 and 2 of TFL27, thereby sustaining its AAC. In 1983, TFL27 was merged with TFL22 which was also held by the Appellant to form TFL46. The AAC of TFL46 included the full AAC of TFL27 immediately prior to the merger. At no time between 1969 and 1983 did the Forest Service reduce the Appellant’s AAC in TFL27 and at no time between 1983 and 1987 did the Forest Service reduce the Appellant’s AAC in TFL46.

16. The Appellant sought and obtained renewals of the Pacific Rim Licences in 1972. Copies of the Pacific Rim Licences are attached as Schedules “D” and “E”. Each renewal was made for a period of seven years and each licence continued to be subject to the provisions of TFL27.

17. At some time between April 28, 1970 and February 1973 the proposed boundaries for the Part III Lands were expanded to include the area covered by the Pacific Rim Licences.

18. In 1978, the Forest Act of British Columbia was amended significantly (with effect from January 1, 1979) and the system of granting and renewing various types of provincially granted timber cutting rights and privileges was changed substantially. Under the amended statute, holders of existing rights and privileges became entitled to replace their existing rights in accordance with the provisions of the Forest Act.

19. In 1979, the Appellant sought and obtained Timber Licences T0005 and T0007 as replacements of the Pacific Rim Timber Licences. Timber Licences T0005 and T0007 were issued in accordance with section 20 of the amended Forest Act. Copies of Timber Licences T0005 and T0007 are attached as Schedules “F” and “G”. Timber Licences T0005 and T0007 covered the identical areas as the Pacific Rim Licences.

20. In 1986, the Province and the Appellant entered into an Exchange Agreement dated December 9, 1986 (the “Exchange Agreement’’) providing for the acquisition by the Province of lands and timber licences held by the Appellant which were required for the establishment of the Pacific Rim National Park. The closing date of the Exchange Agreement was extended from February 17, 1987 to March 3, 1987 by an Amending Agreement entered into between the parties on February 9, 1987. The exchange of property under the Agreement took place on March 3, 1987. A copy of the Exchange Agreement and Amending Agreement are attached as Schedule “H” and Schedule “I”.

21. Under the Exchange Agreement the Appellant disposed of Timber Licences T0005 and T0007 and acquired Timber Licences T0910 and TO911 (the “Replacement Licences”).

22. The Park Agreement was amended in or about February of 1987, to include inter alia, the area covered by Timber Licences TOOOS and T0007 in the description of the Part III Lands, and to delete the obligation on the Province to designate the Part III Lands pursuant to Section 7 of the Park Act. A certified copy of Order-in-Council 331 issued on February 19, 1987 including the amended Park Agreement is attached as Schedule “J”.

23. The Part III lands were transferred to Canada following issuance of Order-in-Council 2141 on October 29, 1987. A copy of the Order-in- Council is attached as Schedule “K”.

24. From the time it acquired the Pacific Rim Licences in 1963 the Pacific Rim Licences were characterized for income tax purposes by the Appellant as timber limits and cutting rights^, [2] a kind of capital property which affords the holder the right to depletion (a special allowance on account of capital) in accordance with Section 65 of the Act and Schedule VI of the Income Tax Regulations based on the volume of timber harvested. The Appellant never claimed any depletion in respect of the capital cost of those licences.

25. When the Appellant replaced the Pacific Rim Licences with Timber Licences TO005 and T0007 in 1979 the Appellant did not recharacterize the tax character of its cutting rights. It treated Timber Licences T0005 and T0007 as continuations of its timber limits and cutting rights in Schedule VI with a capital cost of $259,178.

26. The Appellant never claimed any depletion on Timber Licences TO005 and T0007.

27. Up to the time of the exchange, the Appellant treated Timber Licences T0005 and T0007 as Schedule VI property with an undepleted capital cost allowance of $259,178.

28. The Minister does not agree that the Appellant’s tax treatment of Timber Licences TOOOS and T0007 after their acquisition in 1979 was correct.

29. In reporting the tax consequences of the exchange, the Appellant treated Timber Licences TOOOS and T0007 as capital properties owned by it at December 31, 1971 and thereafter without interruption until the licences were disposed of pursuant to the Exchange Agreement. The Appellant reported no capital gain on the disposition of the licences in its return of income for its 1987 taxation year on the basis that the V-Day value of the licences was equal to the value of the Replacement Licences and the cash received under the Exchange Agreement.

30. In characterizing the acquisition of the Replacement Licences for tax purposes, the Appellant added an amount of $3,442,675 to Schedule VI on the basis that the Replacement Licences continued to be timber limits and cutting rights in Schedule VI.

31. The Minister did not. agree with the manner in which the Appellant reported the tax consequences of the disposition of Timber Licences T0005 and T0007 and the acquisition of the Replacement Licences in 1987. However, that reporting was not altered by any assessment or reassessment of the Appellant for its 1987 taxation year. The Minister attempted to reassess the Appellant for its 1987 taxation year to reflect his view of the tax consequences of the exchange but was prevented from doing so by virtue of the year going statute-barred.

32. In reassessing the Appellant for its 1988 taxation year, the Minister altered the undepreciated capital cost of the Appellant’s property in Class 33 by deducting proceeds of disposition of $4,697,492 from the disposition of Timber Licences T0005 and T0007 and by adding $3,442,675 to that Class as the cost of the Replacement Licences. The Minister also reduced the 1988 opening undepreciated capital cost of the Appellant’s Schedule VI timber limits and cutting rights by $3,442,675. These adjustments were made on the basis of the Minister’s view that Timber Licences T0005 and T0007 were timber resource properties which had been acquired by the Appellant at no cost and that the Replacement Licences were also timber resource properties which had been acquired at a cost of $3,442,675.

33. By making the changes in paragraph 32 the Minister calculated that the undepreciated capital cost of the Appellant’s assets in Class 33 was negative by the amount of $60,094 at the end of its 1988 taxation year and the Minister therefore added the negative amount to the Appellant’s income as recapture for its 1988 taxation year. The Minister thereby reduced the undepreciated capital cost of its assets in Class 33 to nil and disallowed the Appellant’s claim for capital cost allowance of $169,908.

34. In reassessing the Appellant for the September 30, 1988 taxation year, the Minister also applied non-capital losses from other years in amounts differing from the amounts applied by the Appellant in its tax return, at the request of the Appellant.

At issue is whether Licences T0005 and T0007, which replaced the Pacific Rim Licences in 1979, were “timber resource properties” as set forth in paragraph 13(21 )(J. 1) of the Income Tax Act (the “Act’) and if this is so, a further question to be answered is: What was the undepreciated capital cost (“UCC”) of Timber Licences TOOOS and T0007 when they were exchanged in 1987 for the Replacement Licences?

The first issue of this appeal centres on the classification of TOOOS and T0007 at the time of the exchange in 1987. When T0005 and T0007 were exchanged for the Replacement Licences in 1987, the Appellant contends that TOOOS and T0007 were properly classified as TL & CRs. The Appellant submits that it lost its right to cut as the province refused to grant it cutting permits and therefore, its licences were outside the definition of timber resource property. However, the Minister contends that TOOOS and T0007 were timber resource properties and should have been classified accordingly.

As the income tax treatment of these two categories is significantly different (there are several major differences which are relevant to this appeal), the application of the provisions of the Act as they relate to TL & CRs and timber resource properties should be examined.

Timber Limits and Cutting Rights

The Pacific Rim Licences (acquired by the Appellant in 1963) and Licences T0005 and T0007 were characterized by the Appellant for income tax purposes as TL & CRs.

Depletion Allowance

A TL & CR is a type of capital property which is not depreciable based on a “normal” capital cost allowance (“CCA”) percentage. It affords the holder the right to depletion pursuant to paragraph 20(1)(a) of the Act and Part XI (Reg. 1100(1)(e)) and Schedule VI of the Income Tax Regulations (the “Regulations”):

20(1) Notwithstanding paragraphs 18(1 )(a), (6) and (A), in computing a taxpayer’s

income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

The Regulation is found in Part XI of the Regulations:

1100(1) For the purposes of paragraphs 8(1)(7) and (p) and 20(1 )(a) of the Act,

the following deductions are allowed in computing a taxpayer’s income for each taxation year:

(e) such amount as he may claim not exceeding the amount calculated in accordance with Schedule VI in respect of the capital cost to him of a property, other than a timber resource property, that is a timber limit or a right to cut timber from a limit;

Schedule VI

Capital Cost Allowances, Timber Limits and Cutting Rights

For the purposes of paragraph 1100( 1 )(e), the amount that may be deducted in computing the income of a taxpayer for a taxation year in respect of the capital cost to him of a property, other than a timber resource property, that is a timber limit or a right to cut timber from a limit is the lesser of...

The above provisions, which specifically exclude timber resource property, provide the forest industry with a deduction for a TL & CR in the form of a depletion allowance. The formula for this allowance has been omitted as it is unnecessary for the purposes of these reasons. The calculation is based on the volume of timber harvested. Contrasting this scheme, a resource timber property deduction is based on a CCA rate of 15 percent.

In 1979, when Timber Licences T0005 and T0007 replaced the Pacific Rim Licences, the Appellant continued to characterize the licences as TL & CRs. As no timber was ever cut from this area, the Appellant never claimed a depletion allowance in respect of the undepleted capital cost which remained at $259,178 (the original cost of the licences) until the exchange of 1987.

Subsection 65(1)

The Act also provides for the deduction of an amount as an allowance in respect of a “timber limit” in paragraph 65(1 )(a) of the Act. This paragraph was referred to by counsel for the Appellant in paragraph 2 of the Appellant’s argument. This tends to confuse the issue as I believe the regulations which apply to this subsection have not been developed regarding “timber limits”. It appears to be an oversight in the Regulations which renders the application of subsection 65(1) of the Act without meaning as regards “timber limits”. The relevant provisions are:

65(1) There may be deducted in computing a taxpayer’s income for a taxation year such amount as an allowance, if any, in respect of

(a) a natural accumulation of petroleum or natural gas, oil or gas well, mineral resource or timber limit,

as is allowed to the taxpayer by regulation.

The Regulation is found in Part XII of the Regulations:

1200 For the purposes of section 65 of the Act, there may be deducted in

computing the income of a taxpayer for a taxation year such of the amounts determined in accordance with sections 1201 to 1209 and 1212 as are applicable.

1201 In computing a taxpayer’s income for a taxation year there may be deducted such amount as he may claim not exceeding the lesser of...

As it is identified in interpretation bulletin IT-481 [3] (Timber Resource Property and Timber Limits), paragraph 7, “this provision does not have any effect, because Part XII of the Regulations, the prescribed regulation, does not provide for any allowance in respect of a timber limit”. Upon in- spection of sections 1201 to 1209 and 1212 (identified in Regulation 1200), it is noted that there is no reference to a timber limit in any of these provisions. No explanation for this omission or oversight has ever been released. Therefore, it would seem that section 20(1)(a) of the Act and Part XI (Reg. 1100( 1 )(e)) and Schedule VI of the Regulations are the only applicable provisions regarding a capital cost allowance for timber limits.

Timber Resource Property

As stated above, pursuant to paragraph 20(1 )(a) of the Act and Part XI (Reg. 1100(1)(a)) and Schedule VI of the Regulations, a timber resource property deduction is based on a CCA rate of 15 percent, not the depletion of the property. [4]

For the purposes of the above scheme, the definition of timber resource property is contained in paragraph 13(21)(d.1) (as it was in 1988) of the

Act’.

13(21) In this section, section 20 and any regulations made under paragraph 20(1)(a),

(d.1) “timber resource property” of a taxpayer means

(i) a right or licence to cut or remove timber from a limit or area in Canada (in this paragraph referred to as an “original right”) if

(A) that original right was acquired by the taxpayer (other than in the manner referred to in subparagraph (ii)) after May 6, 1974, and

(B) at the time of the acquisition of the original right

(I) the taxpayer may reasonably be regarded as having acquired, directly or indirectly, the right to extend or renew that original right or to acquire another such right or licence in substitution therefor, or

(II) in the ordinary course of events, the taxpayer may reasonably expect to be able to extend or renew that original right or to acquire another such right or licence in substitution therefor, or

(ii) any right or licence owned by the taxpayer to cut or remove timber from a limit or area in Canada if that right or licence may reasonably be regarded

(A) as an extension or renewal of or as one of a series of extensions or renewals of an original right of the taxpayer, or

(B) as having been acquired in substitution for or as one of a series of substitutions for an original right of the taxpayer or any renewal or extension thereof;

Besides their different capital cost allowance treatment, another difference between the two categories is the operation of a capital gain upon the disposition of the property. Unlike a TL & CR, a timber resource property does not give rise to a capital gain upon its disposition. Subsection 39(1) of the Act (as it was in 1988) specifically excludes this category of property:

(1) For the purposes of this Act,

(a) a taxpayer’s capital gain for a taxation year from the disposition of any property is his gain for the year determined under this subdivision (to the extent of the amount thereof that would not, if section 3 were read without reference to the expression “other than a taxable capital gain from the disposition of a property” in paragraph (a) thereof and without reference to paragraph (b) thereof, be included in computing his income for the year or any other taxation year) from the disposition of any property of the taxpayer other than

(iv) a timber resource property;

However, pursuant to section 13 of the Act (as it was in 1988), when a timber resource property is disposed of, the full amount by which the proceeds of disposition exceeds the UCC of the class is included in income as a recapture:

13(1) Where, at the end of a taxation year, the aggregate of all amounts determined

under subparagraphs (21 )(/)(iii) to (viii) in respect of a taxpayer’s depreciable property of a particular prescribed class exceeds the aggregate of all amounts determined under subparagraphs (21)(f)(i) to (ii.2) in respect thereof, the excess shall be included in computing the taxpayer’s income for the year.

In the situation where the proceeds of disposition is greater than the original cost, what would normally be a capital gain for other types of property, is a recapture for the purposes of a timber resource property.

In this case, the Minister calculated that the UCC of the Appellant’s assets in Class 33 was negative by the amount of $60,094 at the end of the 1988 taxation year. Therefore, the Minister added the negative amount to the Appellant’s income as recapture for its 1988 taxation year. Of course, this has been agreed to as being made in error. [5]

Definitions

Having analyzed the income tax ramifications of the two categories, in order to ascertain which scheme applies, it is necessary to determine the definitions of the two terms.

As stated above, “timber resource property” is defined in paragraph 13(21 )(J. 1 ) of the Act. However, a TL & CR is not defined by the Act. As there are only two possible classifications available in the Act, the definition of TL & CR is determined through the process of elimination. As interpretation bulletin IT-481 (Timber resource property and timber limits) identifies in paragraph 8:

any property meeting the requirements of paragraph 13(21)(d.1) is a timber resource property. A property that would be a timber resource property except for the fact that it was acquired before May 7, 1974 is a timber limit.

Therefore, upon an analysis of the facts and documents of this case, if it is determined that the Appellant’s Licenses T0005 and T0007 are not timber resource properties, the licenses would be classified as TL & CRs and the Schedule VI scheme (a depletion allowance and a possible capital gain) would be applicable.

What then is the criteria for determining when a licence is not a timber resource property? The Federal Court of Appeal analyzed the construction of paragraph 13(21)(d.1) of the Act in Kettle River Sawmills Ltd. v. R. (1993), 94 D.T.C. 6086 (Fed. C.A.). The conclusion of Hugessen, J.A.’s analysis in that case is that a licence which was acquired prior to May 6, 1974 is not a timber resource property so long as it is not extended, renewed or substituted after that date.

In analyzing the construction of paragraph 13(21 )(J. 1 ), Hugessen, J.A. determined that subparagraph 13(21)(J. 1 )(ii) was clear. However, the meaning of subparagraph 13(21)(d.l)(i), which is applicable to this case, was not so easily determinable. He said at page 6090:

The difficulty comes in respect of subparagraph (ii) dealing with extensions, renewals and substitutions; both clauses (ii)(A) and (ii)(B) are made to depend upon whether or not the right extended, renewed or substituted for is an “original right”. The use of that term drives the reader back to subparagraph (i) which tells us that the right it describes is “referred to” as an “original right”.

It is this reference back from subparagraph (ii) to subparagraph (i) which creates difficulty and serves as the foundation of the respondents’ argument that no extension, renewal or substitution of a pre May 6, 1974 right which takes place after that date is an acquisition.

The text is not a model of clarity. As we have seen, subparagraph (i) itself imposes in clause (A) the condition that the right, to qualify as an “original right”, must have been “acquired by the taxpayer (other than in the manner referred to in subparagraph (ii)) after May 6, 1974”. But if rights which meet the requirements of clause (i)(B) are to be viewed as original rights only if acquired after May 6, 1974, there would appear to be no room for the operation of subparagraph (ii) which, as indicated, only applies to “original rights” as defined in subparagraph (1). To put the matter another way, if the reference back from subparagraph (ii) to subparagraph (i) is to be read as including the whole of the latter in the definition of “original right”, it is difficult to see what purpose can be served by subparagraph (11).

The answer, as it seems to me, and as determined by the trial judge, lies in the bracketed words in clause (i)(A): “(other than in the manner referred to in subparagraph (ii))”. Those words do two things. First, they indicate that, in the language of the draftsperson, the process described in subparagraph (ii) is one resulting in a right being “acquired”. Secondly, they have the effect of excluding from the meaning to be ascribed to the defined term “original right” in subparagraph (i) the time limitation imposed by clause (i)(A) while retaining the other conditions imposed by clause (i)(B).

This view of the proper construction of paragraph 13(21)(d. 1) is further confirmed by the coming into force provision which is subsection 6(9) of the enacting statute, supra. That provision specifies that paragraph 13(21 )(J. 1 ), which is enacted by subsection 6(9), shall be “applicable in respect of timber resource properties acquired after May 6, 1974” (emphasis added). That provision would not be necessary in respect of those timber resource properties described in subparagraph 13(21 )(J. 1 )(i) for as we have seen it contains in clause 13(21 )(J. 1 )(i)(A) its own built-in coming into force provision. Thus, its only scope is in respect of timber resource properties described in subparagraph 13(21 )(d. 1 )(ii) and the word it employs to describe the process set out in that subparagraph is “acquired”.

From the foregoing, it can be seen that I am in agreement with the views expressed by the trial judge on this point. He said:

While there remain provisions in paragraph (d.1) unexplained to me I have concluded that the reasonable interpretation of it is that original rights may become timber resource properties if initially obtained, renewed, extended or substituted for earlier rights, after May 6, 1974. Among other things I can see no purpose in the coming into force section if it was not intended to fix a time for the commencement of the application of subparagraph (d. l)(ii) to the obtaining by extension, renewal, or substitution, of original rights. Subparagraph (J. l)(i) has its own coming into force provision with respect to initial acquisition: it only applies to such acquisitions after May 6, 1974. Subparagraph (d. 1 )(ii) on its face applies to original rights renewed, extended or substituted for at any time. The coming into force provision, subsection 6(9) of the 1975 Act, can therefore only have some meaningful application with respect to subparagraph (d. 1 )(ii). The latter subparagraph does not by its terms have any starting date for its application and the coming into force provision must have been intended to provide that starting date, in effect making it the same as that provided in subsection (J. l)(i).

It follows that in my view it is irrelevant whether the plaintiffs’ rights or licences to cut, the disposition of which gave rise to the sums in question, were extensions, renewals, or substitutions for original rights initially acquired before or after May 6, 1974.

(Reasons for Judgment, Appeal Book, Common Appendix, Vol. IV, pages 553- 54) and again:

For completeness I would add, although the matter was not seriously disputed, that the original rights consisting of licences bearing quotas, where acquired after May 6, 1974, are the kind of original rights which meet the requirements of sub-subparagraph 13(21 )(d. 1 )(i)(B) as potential timber resources properties. That is, an established operator with a licence to harvest his quota could reasonably be regarded as having acquired the right to extend or renew such original right. In effect with his quota he would, as an established operator, have more than a reasonable expectation of renewing or replacing his licence. Similarly renewals or replacements of licences, no matter when originally acquired, would fall within subparagraph 13(21 )(J. 1 )(ii) as they would be renewals or extensions of, or substitutions for, the right to cut the quota provided by the same licence prior to renewal or to licences replaced by new licences for cutting the same quota.

(Reasons for Judgment, Appeal Book, Common Appendix, Vol. IV, page 555)

The Appellant’s Position

The Appellant contends that the Kettle River decision has no bearing on the characterization of licences T0005 and T0007 as timber resource properties. Its contention is that it had no right “to cut or remove timber from a limit or area” (this is a requirement in the definition of timber resource property, pursuant to paragraph 13(21)(d.1) of the Act. It states that it lost its right to cut under timber licences 8044p and 8045p (and later TOOOS and T0007) in 1969 as a result of the actions of the Forest Service and through pressure brought to bear on it by the provincial government. Specifically, it alleges that the Forest Service refused to grant it cutting permits which it required in order to cut timber in those licence areas.

The Minister’s Position

The Minister submits that the rights of the Appellant always existed, it just never attempted to enforce their legal rights with the Province. The Minister contends that the evidence does not show on the balance of probabilities that the Appellant made any formal application for cutting permits in those licence areas after 1969, or that the Forest Service ever refused to issue such cutting permits.

There does not appear to be any discretion by the Forest Service to refuse a cutting permit if the cutting permit complied with and conformed to the management working plan and development plan. [6]

In conclusion, the Minister contends that the fact that the Appellant never applied for a cutting permit is immaterial. The Appellant had a legal right. When the Pacific Rim Licences were exchanged in 1979 for licences T0005 and T0007, these rights continued to exist in the new licences. The rights were never extinguished and therefore, when the Pacific Rim Licences were replaced in 1979 with TOOOS and T0007, the licences became reclassified as timber resource properties, pursuant to subparagraph 13(21)(J.l)(ii) of the Act.

Determination of First Issue

The Minister’s position conveys the reality of the situation in 1969. The Appellant never lost the rights of the Pacific Rim Licences when they agreed to stop cutting in Compartment 3. Rather, it is my opinion that it chose not to enforce those rights. There may be several reasons why the Appellant took this course of action.

The primary reason that the Appellant never took steps to enforce its rights may be based on its business function in the forest industry and its timber needs at the time. As stated in the facts above, prior to the enactment of the Park Act, Fletcher was allocated an AAC in TFL 27. This allowance was based on the volume of timber within TFL 27 and included the area covered by the Pacific Rim Licences. The agreement in 1969 to suspend logging operations in Compartment 3 did not affect Fletcher’s AAC. The Forest Service allowed Fletcher to increase its amount of cutting in Compartments 1 and 2. In 1983, TFL 46 was formed through the merger of TFL 27 and TFL 22. The AAC in TFL 27 was never reduced and was maintained in TEFL 46.

From the Appellant’s perspective, it was still able to harvest its required amount of timber. From an economic or business perspective, it had no reason to enforce its rights regarding Compartment 3. Its primary concern of its business operation was being satisfied. However, if the AAC had been reduced due to its agreement to suspend operations in Compartment 3 (with no increase in the amount of cutting in Compartments 1 and 2), perhaps it would have taken immediate steps in 1969 to enforce the rights which the Appellant now contends were extinguished by the agreement. If the Appellant had no rights regarding Compartment 3, then why did the government permit Fletcher to increase its amount of cutting in Compartments 2 and 3? This question was not raised at trial so there is no plausible alternative explanation available.

Secondly, it is presumed, taking into account the forest industry and its necessity of utilizing Crown land for harvesting trees, the Appellant wanted to maintain cordial relations with the province. There is evidence to support this.

In order to succeed in having it said that Licences T0005 and T0007 were not timber resource properties, there must be more than a refusal or delay at issuing the cutting permits. The rights of these permits must be extinguished. Here the right remained at all times. There was no extinguishment of that right. There is no doubt but that the Appellant was not willing to press the point by attempting to have its right clarified by an action against the province since it feared that this would otherwise jeopardize a good relationship with the province in the timber business.

The fact that the cutting permits did not issue is not conclusive of the extinguishment of that right, and it is the extinguishment which must happen in order for the timber licenses to cease being a “right or license to cut or remove timber from a limit or area in Canada”.

Having determined that the Appellant did in fact have the necessary rights required by paragraph 13(21)(d.1) of the Act, the resulting conclusion is that TOOOS and T0007 were properly classified by the Minister as timber resource properties pursuant to subparagraph 13(21 )(</. 1 )(ii). The Appellant possessed the required rights and there was an extension, renewal, or substitution of the original rights in 1979. As stated by the Federal Court of Appeal in Kettle River, it is irrelevant whether the rights or licences to cut were extensions, renewals, or substitutions for original rights initially acquired before or after May 6, 1974. In this case, the Appellant acquired the original rights in 1963, when it purchased the Pacific Rim Licences.

The Appellant further argues that the conclusion reached in Kettle River regarding the interpretation of subsection 13(21)(d. 1) of the Act, is no longer good law in light of the Supreme Court of Canada decision, Notre- Dame de Bon-Secours" [7] , regarding the interpretation of tax statutes. Upon a thorough analysis, Gonthier, J.’s summarized the “new” interpretation guidelines at page 5023:

The rules formulated in the preceding pages, some of which were relied on recently in Symes v. Canada [95 DTC 6001], [1993] 4 S.C.R. 695, may be summarized as follows:

— The interpretation of tax legislation should follow the ordinary rules of interpretation;

— A legislative provision should be given a strict or liberal interpretation depending on the purpose underlying it, and that purpose must be identified in light of the context of the statute, its objective and the legislative intent: this is the teleological approach;

— The teleological approach will favour the taxpayer or the tax department depending solely on the legislative provision in question, and not on the existence of predetermined presumptions;

— Substance should be given precedence over form to the extent that this is consistent with the wording and objective of the statute;

— Only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer.

Upon an analysis of the relevant portion of the Kettle River decision, it is my opinion that it is highly doubtful that the rules created in Kettle River would be altered by the Notre-Dame decision. In fact, Notre-Dame appears to confirm that Hugessen, J.A.’s conclusion in Kettle River was correct. The purpose of subparagraph 13(21 )(J. 1 )(ii) was properly identified in light of the context of the statute, its objective and the legislative intent.

Hugessen, J.A. identified the purpose and legislative intention of subparagraph 13(21 )(J. l)(ii) of the Act when he determined that that the purpose of the coming into force section was to fix a time for the application of subparagraph 13(21 )(d. 1 )(ii). Quoting the trial judge, Hugessen, J.A. concluded at page 6091:

...I can see no purpose in the coming into force section if it was not intended to fix a time for the commencement of the application of subparagraph (d. 1 )(ii) to the obtaining by extension, renewal, or substitution, of original rights. Subparagraph (J. l)(i) has its own coming into force provision with respect to initial acquisition: it only applies to such acquisitions after May 6, 1974. Subparagraph (J. 1 )(ii) on its face applies to original rights renewed, extended or substituted for at any time. The coming into force provision, subsection 6(9) of the 1975 Act, can therefore only have some meaningful application with respect to subparagraph (d. 1 )(ii). The latter subparagraph does not by its terms have any starting date for its application and the coming into force provision must have been intended to provide that starting date, in effect making it the same as that provided in subsection (J. l)(i).

The interpretation of subparagraph 13(21 )(J. 1 )(ii) of the Act remains unchanged. A licence which was acquired prior to May 6, 1974 ceases to be TL & CR and is a timber resource property if it is extended, renewed or substituted after that date. This of course is the case here with the extension renewed or substitution of the Pacific Rim Licences in 1979.

Dealing with the second issue: What was the UCC of timber licences T0005 and T0007 at the point which they were exchanged for T0910 and T0911 in 1987?

The Appellant contends that if T0005 and T0007 are timber resource properties, the value of the licences at the time of their disposal in 1987 should be calculated using the reasoning in the D’Auteuil Lumber^ [8] decision. The principle in that case is that the cost of the property should be based on the value of what was given up to originally acquire the property. In other words, the fair market value of the previous property is the cost of the new property.

According to the Appellant, the cost of T0005 and T0007 should be the fair market value of licences 8044p and 8045p in 1979, which it concluded was $4,697,491. This is identical to the value of the proceeds of disposition of T0005 and T0007 in 1987. Consequently, if this is the proper valuation of the cost of T0005 and T0007, as the proceeds of disposition equals the UCC of T0005 and T0007 (the cost would equal the UCC as no allowance was claimed for the property), then there would be no recapture (based on the 1987 agreement) added to the Appellant’s income in its 1988 taxation year.

The Minister, in analyzing the 1979 exchange agreement of licences 8044p and 8045p for licences TOOOS and T0007, determined that there were no proceeds of disposition in 1979 and that TOOOS and T0007 were acquired at no cost. The Respondent submits in paragraph 59 of the Respondent’s Argument that:

...the argument that the Appellant had a cost associated with the new licences cannot succeed. As in the Kettle River case, the Appellant here did not give up anything in order to receive the replacement licences in 1979. Its old licences expired and it received new licences with a right to cut over the same land in replacement for the old licences. The facts are identical with the Kettle River case.

It is my opinion that both the Minister and the Appellant were incorrect in their assessment of the value of the UCC of T0005 and T0007. Applying the principle of the Kettle River decision, the cost of the licences is the value actually paid for them. “Cost means the money or money’s worth which is given up by somebody to get something.” [9]

In this case, the cost of T0005 and T0007 was the original cost that was paid to acquire Special Timber Licences 8044p and 8045p in 1963. This cost was transferred to licences T0005 and T0007 when they replaced the original licences in 1979. As no depletion allowance was ever claimed by the Appellant, the UCC of T0005 and T0007 remained at $259,178.

The Appellant briefly raised a further issue in paragraph 35 of the Notice of Appeal regarding the V-Day value of the licences. The V-Day value is the fair market value of the property on December 31, 1971. When the income taxation system was changed at the end of 1971 so that capital gains were no longer 100% tax-free, the V-Day value was created to ensure that capital gains which occurred prior to December 31, 1971 were not taxed. The adjusted cost base of a property was increased to the V-Day value amount for the purposes of determining the taxpayer’s taxable capital gain upon the disposition of the property.

The Appellant states in its Notice of Appeal at paragraph 35 that the V- Day value of the licences was $4,697,491. There is no evidence to reinforce this contention. However, if this was in fact the correct value, this would mean that the value of the property increased in a most unusual manner between 1963 and 1987. The fair market value of the right to cut timber (based on the applicable licences) in that area would have been $259,178 in 1963, increasing to $4,697,491 by 1971, and remaining at this amount up until the exchange agreement in 1987. This contention does not seem likely.

As no reasonable V-Day value for the property was provided in the evidence at the hearing of this appeal, the most appropriate (if not the only) value to assign to the UCC of T0005 and T0007 is the original cost of $259,178.

Having concluded that T0005 and T0007 were timber resource properties (pursuant to subparagraph 13(21 )(J. 1 )(ii) of the Act), the UCC of $259,178 should be included in Class 33 before the tax consequences of the 1987 exchange agreement are determined.

Thus, the appeal is allowed and the matter referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons for judgment.

Appeal allowed.